Introduction to Economics

Lecturer:
Dr. Tran Binh Dai (Microeconomics)
Dr. Le Van Ha (Macroeconomics)

Bachelor of Economics and Business Administration

Key points:
1. Course Overview

2. Chapter 2: Thinking Like an Economist

3. Chapter 3: Interdependence and the Gains from Trade

Course Overview
Microeconomics
The course begins with exposing students to the benefits of economic specialization, and thus inter-
dependence in our modern market economies. After studying the forces of supply and demand in the
market of goods and services and acknowledging that market is generally the best way to allocate
our limited resources among unlimited wants, major topics of micro-economics such as firm
behaviors and organization of industry, the factor market, and the household behaviors are
subsequently discussed.
Macroeconomics
The second part of the course deals with the role of the government, exploring areas where market
outcomes could be improved by carefully crafted, and properly enforced public policies, setting the
stage for macroeconomic topics, economy wise issues such as economic growth, inflation and
unemployment. This section begins with measuring macroeconomic data, the prelude to
macroeconomic analysis. The huge differences in the standard of living between countries can be
explained by studying topics of the economy in the long-run with an emphasize on the role of
physical, human capital, and the institutional environment. After studying the crucial role of the
monetary system in the modern economy, the rest of the course is devoted to the short-run
macroeconomic topics such as macroeconomic fluctuations and the role of stabilized
macroeconomic policies.
Course Overview

After completing the course, the students are expected to be able to

understand a wide range of economic issues, being able to discern most
topics discussed in the mass media on the economy, make sound contribution
to policy debates, and well-prepared to study other courses in the Bachelor of
Science in Economics and Business.

Language: English

Lectures will be recorded and made available online as soon as possible.

However, online class attendance using WebEx is strongly recommended, and
we will give credits to active class participants. A positive answer/comment will
be recorded as a “+” sign. Students will be asked randomly to answer
questions, to give comments during a session, based on the provided list of
participants.
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Course Overview

Evaluation: Midterm exam 30% (trắc nghiệm), Final exam 70% (20%
micro: điền vào chỗ trống, short answer. 80% là macro).

Principles of Economics by G. Mankiw. The latest is the 8th edition.

However, the 7th edition available at the library is also usable.

Course schedule, syllabus and learning materials are uploaded on

elearning system.

Contact me at: [email protected]

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Preface

What is economics?

Why do we need to study economics?

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What is economics?
Resources are scarce
Scarcity: the limited nature of society’s resources
Society has limited resources (raw materials, tools, land, labors, income,
time)
Cannot produce all the goods and services people wish to have
Economics
The study of how society manages its scarce resources
Economist study:
How people decide what to buy, how much to work, save, and spend.
How firms decide how much to produce, how many workers to hire.
How society decides how to divide its resources between national defense,
consumer goods, protecting the environment, and other needs.

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Why do we need to study economics?
Understand the world in which you live.
+ Why are apartments so expensive in big cities?
+ Why are living standards so meager in many African countries?
A more astute participant in the economy
+ Once you take a job, you decide how much of your income to spend,
how much to save, and how to invest your savings
+ Run your own business
Better understanding of both the potential and the limits of economic
policy
+ What are the impact of taxation?
+ What are the effects of free trade with other countries?

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Course content

Introduction
How markets work (demands, supplies)
Market and welfare
Firm behavior and the organization of industry
The economics of labor market
Topics for further study (other markets)

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N. GREGORY MANKIW
PRINCIPLES OF

ECONOMICS
Eight Edition

Chapter 2 Thinking like a Economist

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The Economist as a Scientist

Economists play two roles:

1. Scientists: try to explain the world (investigate, hypothesis,…)
2. Policy advisors: try to improve it
As scientists, economists employ the scientific method
Dispassionate development and testing of theories about how the
world works

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The Economist as a Scientist

Assumptions
Simplify the complex world and make it easier to understand
Example: to study international trade, assume two countries and
two goods
Economists use models to study economic issues
Highly simplified representation of a more complicated reality

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The Economist as a Scientist

Circular-flow diagram
Visual model of the economy
Shows how dollars flow through markets among households and
firms
Two decision makers
Firms and Households
Interacting in two markets
Market for goods and services
Market for factors of production (inputs)

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Figure 1: The circular flow
Households:
Households:
 Own
Own thethe factors
factors of
of production,
production,
sell/rent
sell/rent them
them toto firms
firms for
for income
income
 Buy
Buy and
and consume
consume goods
goods & & services
services

Households
Firms

Firms:
Firms:
 Buy/hire
Buy/hire factors
factors of
of production,
production,
use
use them
them to
to produce
produce goods
goods and
and services
services
 Sell
Sell goods
goods && services
services

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Figure 1: The circular flow

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The Economist as a Scientist

Microeconomics
The study of how households and firms make decisions and how
they interact in markets
Macroeconomics
The study of economy-wide phenomena, including inflation,
unemployment, and economic growth

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The Economist as Policy Adviser

Positive statements: descriptive

Attempt to describe the world as it is
Confirm or deny by examining evidence: “Minimum-wage laws
cause unemployment”
Normative statements: prescriptive
Attempt to prescribe how the world should be: “The government
should raise the minimum wage”

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Minimum wage in Vietnam

The lowest wage permitted by law

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The Economist as Policy Adviser

Vietnamese Economic Advisory Group

Source:
http://news.chinhphu.vn/Home/PM-establishes-independent-Economic
-Advisory-Group/20177/31346.vgp

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Summary

Economists are scientists (use research,… to describe terms,…)

Make appropriate assumptions and build simplified models
The circular-flow diagram
Microeconomists: study decision making by households and firms
and their interactions in the marketplace
Macroeconomists: study the forces and trends that affect the
economy as a whole
A positive statement is an assertion about how the world is
A normative statement is an assertion about how the world ought to be
As policy advisers, economists make normative statements

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N. GREGORY MANKIW
PRINCIPLES OF

ECONOMICS
Eight Edition

Chapter 3 Interdependence and

the Gains from Trade

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Interdependence

Every day you rely on many people from around the world, most of
whom you’ve never met, to provide you with the goods and services
you enjoy.
Examples:

Hans Riegel, Bonn

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Example
“Trade can make everyone better off”
Two countries:
The U.S. and Japan
Two goods:
Computers and wheat
One resource:
Labor, measured in hours
How much of both goods each country produces and consumes
If the country chooses to be self-sufficient
If it trades with the other country

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Example
Production Possibilities in the U.S.
The U.S. has 50,000 hours of labor available for production, per
month
Producing one computer requires 100 hours of labor
Producing one ton of wheat requires 10 hours of labor

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The U.S. Production Possibility Frontier (PPF)
The U.S. has enough labor to
produce 500 computers, or 5,000
tons of wheat, or any combination
along the PPF.

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Japan’s PPF
Production Possibilities in Japan
Japan has 30,000 hours of labor available for production, per
month.
Producing one computer requires 125 hours of labor.
Producing one ton of wheat requires 25 hours of labor.

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Japan’s PPF
Japan has enough labor to
produce 240 computers, or
1,200 tons of wheat, or any
combination along the PPF.

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Production without trade
Suppose the U.S. produces 3400 tons of wheat requiring 34,000 labor
hours
The remaining 16,000 labor hours are used to produce 160
computers
Suppose Japan produces 240 computers, requiring all of Japan’s
30,000 labor hours.
So, Japan would produce 0 tons of wheat.

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Production without trade

US: 3400 Wheat, 160 Computers Japan: 0 Wheat, 240

Computers
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Consumption With and Without Trade
Without trade:
U.S. consumers get 160 computers and 3400 tons of wheat
Japanese consumers get 240 computers and 0 tons of wheat
Comparison
Consumption without trade vs. consumption with trade
We need to see how much of each good is produced and traded by
the two countries

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Exports and Imports
Imports
– Goods produced abroad and sold domestically
Exports
– Goods produced domestically and sold abroad

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Production under trade
Suppose the U.S. exports 700 tons of wheat to Japan, and imports
110 computers from Japan. (Japan imports 700 tons wheat and
exports 110 computers.)

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U.S. Consumption With Trade

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Japan’s Consumption With Trade

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Trade Makes Both Countries Better Off
Suppose Japan and U.S. uses half its labor to produce each good.

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Where Do These Gains Come From?
Absolute advantage
Measures the cost of a good in terms of the inputs required to
produce it
Another measure of cost: opportunity cost
The opportunity cost of a computer = amount of wheat that could
be produced using the labor needed to produce one computer

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Remember
Production Possibilities (Frontier) in the U.S.
The U.S. has 50,000 hours of labor available for production, per
month
Producing one computer requires 100 hours of labor
Producing one ton of wheat requires 10 hours of labor

Production Possibilities in Japan

Japan has 30,000 hours of labor available for production, per
month.
Producing one computer requires 125 hours of labor.
Producing one ton of wheat requires 25 hours of labor.
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Where Do These Gains Come From?
Absolute advantage:
The ability to produce a good using fewer inputs than another
producer
The U.S. has absolute advantage in wheat
Producing a ton of wheat uses 10 labor hours in the U.S. vs. 25
in Japan
The U.S. has absolute advantage in computers
Producing one computer requires 125 labor hours in Japan, but
only 100 in the U.S.

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Comparative Advantage
The opportunity cost of a computer is
10 tons of wheat in the U.S.:
Producing one computer requires 100 labor hours, which
instead could produce 10 tons of wheat
5 tons of wheat in Japan:
Producing one computer requires 125 labor hours, which
instead could produce 5 tons of wheat
Japan has comparative advantage in computers

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Comparative Advantage
Comparative advantage
The ability to produce a good at a lower opportunity cost than
another producer
Principle of comparative advantage
Each good should be produced by the individual that has the
smaller opportunity cost of producing that good
Specialize according to comparative advantage

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Where Do These Gains Come From?
The U.S. has an absolute advantage in both goods!
So why does Japan specialize in computers?
Why do both countries gain from trade?

Two countries can gain from trade

When each specializes in the good it produces at lowest cost

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Comparative Advantage and Trade
Gains from trade
Arise from comparative advantage (differences in opportunity
costs)
When each country specializes in the good(s) in which it has a
comparative advantage
Total production in all countries is higher
The world’s “economic pie” is bigger
All countries can gain from trade

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Example
Argentina, 10,000 hours of labor/month:
producing 1 lb. coffee requires 2 hours;
producing 1 bottle wine requires 4 hours
Brazil, 10,000 hours of labor/month:
producing 1 lb. coffee requires 1 hour
producing 1 bottle wine requires 5 hours
1. Which country has an absolute advantage in the production of
coffee?
2. Which country has a comparative advantage in the production of
wine?

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Answer
1. Brazil: absolute advantage in coffee
Producing 1 lb. coffee:
One labor-hour in Brazil, but two in Argentina.
2. Argentina: comparative advantage in wine
Argentina’s opportunity cost of wine is 2 lb. coffee
The four labor-hours required to produce a bottle of wine could
instead produce 2 lb. coffee
Brazil’s opportunity cost of wine is 5 lb. coffee

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Summary
Interdependence and trade are desirable
Allow everyone to enjoy a greater quantity and variety of goods
and services
Comparative advantage: being able to produce a good at a lower
opportunity cost
Absolute advantage: being able to produce a good with fewer inputs
The gains from trade are based on comparative advantage, not
absolute advantage (use less inputs to produce)
Trade makes everyone better off
It allows people to specialize in those activities in which they have
a comparative advantage

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Multiple choices
1. Trade between countries
a. allows each country to consume at a point outside its production
possibilities frontier.
b. limits a country’s ability to produce goods and services on its
own.
c. must benefit both countries equally; otherwise, trade is not
mutually beneficial.
d. can best be understood by examining the countries’ absolute
advantages.

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Multiple choices
2. Suppose the United States has a comparative advantage over Mexico
in producing pork. The principle of comparative advantage asserts
that
a. the United States should produce more pork than what it requires
and export some of it to Mexico.
b. the United States should produce a moderate quantity of pork
and import the remainder of what it requires from Mexico.
c. the United States should refrain altogether from producing pork
and import all of what it requires from Mexico.
d. Mexico has nothing to gain from importing United States pork.

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Multiple choices
3. Suppose the U.S. and Japan both produce airplanes and televisions
and the U.S. has a comparative advantage in the production of
airplanes while Japan has a comparative advantage in the production
of televisions. If the U.S. exports airplanes to Japan and imports
televisions from Japan,
a. both countries, as a whole, will be better off.
b. all individuals in both countries will be better off.
c. both countries, as a whole, will be worse off.
d. all individuals in both countries will be worse off.

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Review questions
1. Explain how absolute advantage and comparative advantage differ.

2. Maria can read 20 pages of economics in an hour. She can also read
50 pages of sociology in an hour. She spends 5 hours per day
studying.
a. Draw Maria’s production possibilities frontier for reading economics
and sociology.
b. What is Maria’s opportunity cost of reading 100 pages of sociology?

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 Thank you

Bachelor of Economics and Business Administration

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